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Best Stock for 2008: General Electric

It's not just a blue chip for widows and orphans.

No matter what method you use to find them, great investments stand out for a variety of reasons -- all of which point to future success.

Consider, for example, large-cap stocks. In selecting these, some investors look for established leaders in their industry, companies that make the rules and force others to follow suit. Others seek steady income through ever-increasing dividends. Still others search out innovative businesses that jump on the latest trends and find opportunities for new growth.

A great large-cap stock puts all these factors together into a single package. One example is General Electric (NYSE:GE).

A history of excellenceGE is no Johnny-come-lately to American business. Founded when inventor Thomas Edison merged his Edison General Electric with competitor Thompson-Houston in 1892, the conglomerate is the only original member still included in the Dow Jones Industrial Average. The company has been on the cutting edge for more than 100 years, pioneering advances in everything from consumer appliances to jet engines to plastics to lasers to computers.

More recently, GE has embraced its expansion beyond its industrial roots. It has become a media powerhouse, with its investment in the NBC network culminating in its 2004 purchase of Vivendi's Universal. Its finance divisions lend money to consumers and businesses alike. All told, the company consistently ranks among the nation's top 10 employers, and in terms of market capitalization, GE is second only to oil behemoth ExxonMobil (NYSE:XOM) among U.S. stocks, beating out Microsoft and AT&T.

Paying rewardsIf you're looking for consistent dividend income -- and there's certainly a case to be made for dividend-paying stocks -- it's hard to do better than GE. The company has paid dividends for more than a century. It has raised its dividend every year since 1975. Currently, the stock sports a 3.3% dividend yield -- not the highest you can find, but well above the S&P 500's yield of 1.9%.

Where GE has struggled, however, is in translating its favorable business prospects into higher stock prices. The shares are up just more than 2% from three years ago, even though its per-share net income has risen 38% over the same time frame.

A catalyst in the windSo with earnings growth outpacing share gains, what will push GE shares up? I'm betting on its increasing strength in the energy sector.

Energy is a relatively small part of what GE currently does -- the company's energy arm had revenue of about $19 billion last year, representing about 11% of GE's total revenue. But the head of GE Energy believes revenue could grow to more than $30 billion by 2009, with renewable energy making up $5 billion to $6 billion of that total. The company expects strong growth from both the wind and solar energy segments.

When it comes to energy, GE has its bases covered. As a major player in the wind turbine market against German rival Siemens (NYSE:SI), GE is positioning itself as a force to be reckoned with in alternative energy. The company also produces and retails its own solar energy systems for commercial and personal use and has a strong, vertically integrated chain between production and end users. Smaller and less well-capitalized solar players like Suntech Power (NYSE:STP) and First Solar (NASDAQ:FSLR) may struggle to keep up as the solar power market matures.

Yet while the company has embraced alternative energy, it hasn't turned its back on more traditional resources. Coal is cheap and readily available, but it is a relatively dirty fuel. GE's coal gasification technology allows power plants to use coal to generate electricity while minimizing pollution. The company has also been working to improve electricity transmission infrastructure both in the U.S. and abroad.

Energy may be the catalyst to draw investors' attention, but a closer look shows that GE is also getting the rest of its business segments firing on all cylinders. It sold off its troubled plastics unit, giving it capital to buy a more profitable aerospace equipment company. More recently, GE swooped in and purchased a majority stake of the distressed commercial finance unit at Merrill Lynch (NYSE:MER). At the same time, the company has stepped up share repurchases and seems committed to retaining only the most profitable parts of its business. Its AAA credit rating is symbolic of GE's financial strength, and with nearly $20 billion in cash and short-term investments, GE will likely continue to take advantage of the credit crunch and its impact on less secure competitors.

What investors thinkOn Motley Fool CAPS, where more than 78,000 professional and novice investors alike have rated more than 5,300 stocks, sentiment for General Electric's prospects is overwhelmingly positive. Out of more than 4,500 players who've rated the stock, 92% think GE will outperform the S&P 500 in the coming months and years. Looking at just CAPS All-Stars (those in the top 20% of all rated players), that number improves to more than 93%.

Do you agree? If so, head over to CAPS right now and give General Electric a thumbs-up recommendation. And while you're there, take a look around and see all the ways in which CAPS can make you a better investor.

Fool contributor Dan Caplinger lives in GE country, but he doesn't own shares of GE or any other company mentioned in this article. Microsoft is an Inside Value recommendation. Suntech Power is a Rule Breakers selection. The Fool's disclosure policy is a great pick for 2008 and beyond.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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